Crypto in an Hour: Extra Credit – DAOs

by | Dec 10, 2019

Now that you’ve made it through the blockchain and Bitcoin, you should know enough to talk to anybody about all things crypto. If you dig deeper into this space, you’ll find ever more complex topics that crypto enthusiasts like to discuss. To that end, here are a handful of lessons on extra topics.

One of the interesting applications of smart contracts is a DAO, or Decentralized Autonomous Organization. A smart contract allows the creators of a DAO to hard-wire the functions of the organization. The smart contract of the DAO can dictate how money is spent, where it goes, and how often. The smart contract can stipulate who has access to the blockchain, or how changes are made. Any decision that is usually left up to a governing body can be encoded into a DAO’s smart contract. This provides the organization with an environment where rules and procedures couldn’t be bent, broken, or neglected, but are digitally enforced.

The same way that bitcoin decentralizes monetary transactions, DAOs can decentralize democracy. Rules are set up that dictate who gets to be a stakeholder and how voting on decisions takes place. The stakeholders get to vote on what new rules to implement, which rules to change, or if a rule needs to go. Optimally in a DAO, the governance is completely decentralized. It wouldn’t be possible for the rogue actions of one person to change the rules to their own benefit.

Despite all the possible benefits of DAOs, they present their own set of risks. Once the smart contract of a DAO is published, it can be very hard to stop. This has prompted the saying “unstoppable code.” It’s possible that the code of the smart contract is published before a bug or loophole is found. Because the process of changing rules takes a certain procedure, the DAO itself doesn’t allow for quick action to be taken to fix the problem.

The most infamous DAO was called “The DAO,” and it suffered from this exact problem. A loophole was found in the code and by the time enough people had convened to fix the problem, a hacker had stolen $50 million. Members of the DAO knew what the problem was and could even watch the money drain away, but because the hacker was acting according to the rules of the smart contract, there was nothing they could do. The attack spelled the doom for The DAO and caused a hard fork in the Ethereum blockchain.